17 Jan How Deutsche Bank’s Major U.S. Mortgage Settlement Will Affect You

Deutsche Bank recently agreed to pay $7.2 billion, and a $1.2 billion pretax charge the 4th quarter of 2016, to U.S. authorities as a settlement to resolve investigations carried out by the Department of Justice into the proliferation of toxic debt that played a huge role in the financial crisis. The principle agreement is not a final agreement and Deutsche Bank cautioned that there is not guarantee that both sides will agree on the final settlement.

The DOJ had initially slapped a fine of $14 billion on Germany’s biggest bank, but Deutsche had made it clear that it would not pay such a large amount. The bank’s stock had nosedived after news about the DOJ fine broke out in September and the bank is expected to post losses for the second straight year running. The amount of the fine is a victory of sorts for Deutsche as many experts feared the DOJ would adopt a far tougher stance.

The settlement is only related to the mortgage-securities case. Most Deutsche loans are serviced by OCWEN and NATIONSTAR. Deutsche Bank is battling at least 7,000 legal fights around the world. Some of the major cases include the alleged manipulation of forex rates, violations of U.S. sanctions in Iran & other countries, and suspicious equities trade in Russia.

How did Deutsche land in hot water?

The bank is alleged to have engaged in several illicit practices in the way it selected mortgages

The residential mortgage-backed securities (RMBS) were under the scanner due to the way there were branded as bonds and sold to investors

The bank played a huge role in the 2008 crisis thanks to the way it created and sold subprime mortgages

The bank is purported to have manipulated core lending and forex rates from at least 2005 onwards

It assisted numerous hedge funds in getting illegal tax breaks

The DOJ alleged that the bank had failed to put any functional risk controls in place

How will the settlement be paid out?

The bank has a principle agreement with the Justice Department to pay $7.2 billion. The bank will pay a civil penalty of $3.1 billion and give $4.1 billion in relief to consumers according to its press release in December, 2016. The civil penalty is expected to be paid directly to the Justice Department, but it is unclear when this payment will be made.

The agreements are expected to be finalized this week before the Trump administration takes over from the Obama administration, but it is unclear if this will happen. Reports have stated that the bank is willing to take its chances with Trump, who is a longtime customer of the bank, but we can be certain that the DOJ will not roll back on the sanctions. Senator Jeff Sessions, who is expected to lead the DOJ under President-elect Trump, has stated that he his uninformed about the case, so it is unclear if he will be ready to show Deutsche Bank any leniency.

How will it provide consumer relief?

The bank has stated that it will provide consumer relief to the tune of $4.1 billion over a period of five years or more. Relief is expected to be provided in the form of loan modifications and other forms of assistance to homeowners and borrowers. The bank is currently looking for ways to avoid utilizing its balance sheet to purchase mortgages that it can partially forgive.

The bank is considering loans to private equity and hedge funds as a way to meet the $4.1 billion relief obligation. This option would basically include lending money to a firm such as Lone Star Funds, which will then purchase bad mortgages via government auctions. The goal of this operation is to reduce the obligations of the consumers involved, but this is not final.

Will the DOJ agree to it?

This method of providing consumer relief has received a lot of criticism as critics allege that banks are not bearing the full burden of the aid. Critics site the example of the Bank of America which received credits for relief on loans that it had made. It is also not clear if the government will sign off on this method and neither Deutsche Bank nor the DOJ have commented on this issue.

Piers Brown, an analyst to Macquarie Bank Ltd., stated that this method would tie up a much, much smaller sum of capital than directly writing off a bad mortgage to zero on the bank’s balance sheet. If this method is agreed upon by the new DOJ, it could lead to activists protesting and potentially raising new lawsuits. Senator Elizabeth Warren (D-MA) is expected to lead the fight on this issue as she and other lawmakers joined consumed groups in 2015 to criticize theses kind of government auctions.

How will the benefits trickle down to the consumer?

It is yet unclear how consumers of Deutsche Bank will benefit from and how they will receive their loan modifications. The bank could feasibly delay the settlement as it looks to make a deal with the new federal government, which is only going to antagonize consumer groups further. If the DOJ accepts the bank’s settlement offer within the next few months, consumers can expect to see relief come to fruition by the final quarter of 2017.

RA & Associates can help homeowners with loan modifications and principal reductions on their loans, being mandated by the US DOJ. Call Romel Ambarchyan today to learn what he can do for you and your home.

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